System Overhaul

The next indemnity year marks a watershed for professional cover for solicitors. From 1 October, the final changes will be introduced as part of our Financial Protection Policy, which we embarked on more than two years ago.

The challenge was to ensure we have professional indemnity insurance (PII) arrangements in place which provide the required level of consumer protection and are sustainable for the long term. We therefore decided to overhaul the current system, with the phased closure of the assigned risks pool (ARP) at the centre of the changes.

It had become clear the ARP system was no longer sustainable, and was significantly hampering the operation of a competitive and sustainable market for solicitor PII. The best way of ensuring client protection is through a competitive and open insurance market, and that principle has been at the heart of the changes we made.

For the indemnity year 2013/14, the changes will be:

The ARP will cease to provide policies of qualifying insurance and will be replaced with a system where insurers offer a three-month extended policy to firms which cannot obtain PII for the following year. A firm may continue to practise while it attempts to obtain a qualifying insurance policy for the first 30 days of the extended indemnity period. For the remaining 60 days (‘the cessation period’), the firm may only work on existing instructions, and while it attempts to find insurance, or conducts an orderly closure of its practice where that insurance is not obtained. The single renewal date will be maintained until October 2013 to facilitate the transition, but will be removed for any policy starting on or after 1 October. The existing ‘side arrangement’, whereby coverage is provided to uninsured firms that have not applied or are not eligible to enter the ARP, was withdrawn with effect from 1 October 2012, and instead claims arising from such firms will continue to be met by the Compensation Fund. As suggested by the Law Society, the Qualifying Insurers List will change its name to the Participating Insurers List. This is to remove any misunderstanding that the insurers involved have undergone any vetting by the SRA. These final arrangements are part of a policy that will: create conditions that increase the likelihood of existing insurers remaining in this market; boost the number of new insurers entering the market; and encourage greater levels of competition for business between providers, while continuing to provide redress when something goes wrong.

In closing the ARP, we opted for a phased approach to ensure a smooth transition and stability in the PII market. So these changes are a continuation of arrangements made in 2012 and 2011. This allowed us to mitigate against the consequences that the alterations may have had on the market during this time.

We will be carefully monitoring the effect of the changes on the market. Our role in ensuring that the current system of firms sourcing their own insurance continues to work is to make sure the market remains competitive and sustainable.

We have also put new systems in place for insurers to alert us at an early stage where firms are experiencing problems. This means we can provide early support to firms and, where necessary, protect consumers from a sudden and disorderly closure, which is consistent with our risk-based approach to regulation.

We will be offering all support possible to those firms that find that they cannot find insurance on the open market by 1 October. Introducing the phased approach to closing the ARP, however, has greatly reduced the number of firms that have found themselves in this situation.

In October 2010, there were 405 applications from such firms to enter the ARP. In 2011, this number had shrunk to 54, and by 2012 there were just 26 applications to enter the pool. This hopefully indicates that the number of firms affected this year will be low.

For those firms unable to obtain new insurance, our initial approach will be through our supervision team. Supervisors can work with the firm to facilitate orderly closure and the transfer of cases, ensure clients are properly informed and ensure the transfer of their matters to other firms. We would expect professional, regulated individuals and firms to co-operate and, in accordance with their regulatory obligations, act in the best interests of their clients.

Our work on PII is never done however, and some of you may be aware that we are reviewing the risk to clients when a firm’s insurer gets into financial difficulties.

To be eligible to write compulsory professional indemnity insurance for solicitors, an insurer must be authorised by the Prudential Regulation Authority (PRA) or be an EEA insurer passported into this country to write insurance business. We have always deferred to the relevant regulatory bodies to vet the financial stability of insurers, but we decided two months ago, when Latvian insurer Balva encountered regulatory issues in its own country, to review the current arrangements with a view to reducing the risks of a participating insurer becoming subject to an insolvency event.

The review will be completed in time for any decisions to be made for the indemnity period starting on 1 October 2014.

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